Comparison of Public and Private Practices

(Lewis 1955) observed succinctly that “nearly everything that governments do private companies have done at some time or other, not excluding providing roads, police, fire services, or arbitration. Indeed, in most of the spheres of public service the pioneering has been done by private entrepreneurs, and governments have come in only at a relatively late stage” (p. 412). Also, “they have, however, everywhere come in to take these services over from private entrepreneurs, since it has everywhere seemed preferable to have the ‘public’ services operated by ‘public’ authorities.” Regardless of the origin of an activity, whether the private or the public sector, several areas are clearly similar, and some are not. Some argue that these differences are narrowing and that the distinction itself may have been exaggerated in some disciplines such as public administration. Gunn (1988) argues, for example, that the view generally held as part of public administration discipline that the two types of activities are fundamentally separate from each other is oversimplistic. But the intent here is not to examine in detail the claims and counterclaims on the existence or otherwise of a great divide between the two sectors, much less to resolve the debate, but to illustrate it in preparation for a more detailed discussion in later sections and chapters of the applicability to the public sector of some private sector practices. This discussion is facilitated by extensive literature in this area.²

The characteristics of modern bureaucracy as envisaged by Weber were common to the state and an enterprise regardless of ownership. He envisaged three characteristics as relevant for an organization: (1) the regular activities are assigned as official duties; (2) the authority to give commands for these duties is distributed in a balanced way; and (3) methodical provision is made for the regular and continuous fulfillment of these duties and for the exercise of corresponding rights. These elements constituted an agency in “the sphere of the State” and a bureaucratic enterprise in “the sphere of the private economy.” Subsequent debate, however, went into greater detail, and several words with different connotations have come into use. Notwithstanding the general impression that such words as public, government, and private are clear, it is prudent to specify them carefully before embarking on an extended discussion of the implications of the practices of each.

An essential first step is to define the terms used in discussion: “public” or “government” are used more often than not synonymously, and so are “private” or “commercial.” “Public” has a specific connotation when used in public finance, where public sector would include general government (central plus regional, state, or local governments), their enterprises, and, sometimes, social security funds. “Government” is somewhat more restrictive; it refers to the state organs and its administrative agencies, and generally excludes enterprises, social security funds, and the numerous quasi-autonomous organizations that are established, funded, and operated by the government but are not included in the government proper. But the definitions in practice vary depending on the purpose and the user. For example, in some practices (as with the Bureau of Labor Statistics in the United States, or the approaches of the Manual on Government Finance Statistics published by the IMF), the postal service is treated as a commercial or private sector activity. Similarly, credit extended to public enterprises is usually shown as part of credit to the private sector in monetary statistics. From an organizational point of view (as already noted from Weber’s approach), the differences between the two may be less clear. In fact Galbraith suggests that many privately owned firms have so much market power and influence on the public that they may no longer be “private.” Weidenbaum also suggests that some corporations are so dependent on government work that they may take on certain attributes of government agencies.³ Indeed, in a number of sectors, government may be the sole consumer of some private companies, which, while adjusting to the interests of their clients, may acquire some of their features. Ownership apart, the two types of organization appear to differ more in specific features than in structural and environmental factors. It is recognized that the principles of modern management POSDCORB (planning, organizing, staffing, directing, coordinating, reporting, and budgeting) have a universal applicability that transcends the natural or artificial barriers between government organizations and private sector organizations.⁴ This, however, views management as the practice of planning, organizing, leading, and controlling the operations of an agency, organization, or firm so that the best possible results may be obtained in achieving its objectives with the given monetary, material, and manpower resources. (The last two are dependent on the first.) In reality, however, there are differences between private and government agencies.

From a structural point of view, a number of writers⁵ suggest that public scrutiny and the relative openness of decision making in the public sector create more constraints on the public organization. Primarily because of this, and in comparison with private sector organizations, policy directives tend to be broad, frequently ill-defined, and contradictory, thereby restricting the public administrator. The organizations may not be given a proper charter and may have excessively fragmented responsibilities. Their time horizons tend to be shorter; policy coalitions are less stable and are usually not sustained during the implementation stage. The high level of unionization, difficulty of withdrawal, lack of specificity in organizational performance, and absence of incentives for effective performance have their own impact on the organizational processes and functioning.

From an environmental point of view, excessive political influence, uncertainty about the roles of civil servants, ministers, and their relationships, the need for fairness, responsiveness, accountability, and honesty, and numerous legal and formal constraints (in particular, judicial) add additional dimensions to a public organization relative to those of a private organization. If, as argued by one strand of management theory, the creation of a proper working climate⁶ enhances productivity in that organization, then a public organization is susceptible to a greater variety of influences than a private organization. Unlike the private sector with an identified stakeholder, politicians, taxpayers, voters, and expenditure beneficiary groups in the public sector constitute a wider group of stakeholders. In addition, there is the frequent problem of identifying also the customer in the public sector, and of determining which specific issue will assume what practical or political importance in a constantly changing environment. For the private sector, there is a bottom-line appraisal in terms of profit, market performance, and survival. Consequently, its strategic management is aimed at serving these goals. In the public sector, there is often a conflict between the objective and its feasibility on the one hand, and the need for accountability on the other. As a result, strategic management has been more evident in terms of limits on inputs (manpower, etc.) than in what needs to be accomplished.

Although the unique features of the public organization therefore need to be taken into account in designing systems and techniques, economists did not pay much attention to many of these crucial aspects until recently. As Wicksell noted at the turn of the century, much of fiscal theory implicitly assumes that society is ruled by a benevolent despot.⁷ Even a benevolent despot cannot afford to neglect the contribution of organization to his effort. Allocative efficiency—the key ingredient of public expenditure management—cannot in practice be achieved on the familiar notion of economic rationality. Decision makers are rational, it is held, and individuals are the best judges of their own welfare. But individual choice may not necessarily reflect collective choice, as voters may often have an incentive to misrepresent their true preferences. Indeed, no voting scheme (as shown in Arrow’s “impossibility” theorem) yet permits a perfect aggregation of individual preferences into the will of the people. More recent forays into these aspects by the public choice theory suggest that welfare economics had by and large not analyzed the full implications of the political process. To them, bureaucrats are maximizers of their own objective function, and therefore there is little to sustain the dictum that governments will improve the allocative efficiency of markets through policy interventions. These aspects, it is contended, contribute to bureaucratic failure. To avoid this failure, public choice theory offers a fiscal constitution that sets limits on spending and on tax rates. Any constitution, however, requires an organization to sustain it. Public choice theory has so far addressed only a few of the aspects that are dealt with by public organizations, particularly in areas of the design of contract and incentive structures.

The debate on the need for the public organization to learn from the private sector continues to build, because of the problems associated with bureaucratic failure and the urgent need to reduce them. Some contend that the problems of the public organization are inherent in the situation as reflected in the “democracy is messy” argument.⁸ Drucker argues, reflecting some of the features of public organizations described earlier, that the lofty objectives, attempting to do too many things at the same time, the debatable belief that large organizations achieve their goals because of their size, and the inability both to abandon programs that are no longer useful and to learn from experience accentuate the failure. It could be argued, on the other hand, that human failures occur in all types of organizations and because of particular situations rather than because of the design of the institution.

Specifically, in the area of public expenditures, auditors have frequently pointed out the problems of failures in the “oldest and newest social institution”—government. For example, Bourn (1989), reviewing the experience of the United Kingdom, points out that most common problems were in the areas of asset management, application of commercial insights, project management, monitoring and control, provision of services to clients, and observance of management standards. Similarly, Naderx (1988) argues that government has to follow the practices of corporations, liberate its mind from bureaucracy-induced inhibitions, develop strategic planning over a longer time horizon, manage its assets properly, and transform itself into a “citizen-driven government.”

All the above approaches have some validity on an abstract level. On a more specific level, it is the organization—its processes, systems, techniques, and operational procedures—that will have to strive to internalize all the constraints that form an integral part of the features of a government. As Wilson (1989) noted, “the key difference between more and less successful bureaucracies… has less to do with finances, client populations, or legal arrangements than with organizational systems” (p. 23; emphasis added).

Governance and Transparency

These concepts, which have over the years framed the discourse on financial management in government, have once again begun to dominate public debate during the last two years. The renewal of this debate may even imply that the normal presumptions associated with public accountability have not been fulfilled. Such nonfulfillment may however be relative in that public expectations have increased and have not been affected by corresponding public scrutiny, or it may be that accountability has been less than it was. The debate may have revived for several reasons. The customary care that a state is expected to provide to its citizens has not materialized. In personal life, each individual saves money and builds up related assets not merely for himself but for his progeny and future generations. Indeed, the main goal for many householders, after middle life, is to gather adequate resources for their offspring so that they can have a more secure future than their parents enjoyed. Similarly, a state should take an intertemporal view and build up security for future generations. In a context where governments are substantially indebted, the physical assets left for future generations are in disrepair and require massive investment to be restored to full operation, the cumulative environmental pollution threatens to reduce life spans despite medical progress, and families find that the value of their savings is eroded by the imprudent, inflationary financing policies followed by governments, this expectation has not materialized. The lack of a legal framework conducive to economic development, the existence of too many procedural layers and regulations that tend to promote rent-seeking behavior among civil servants, the lack of consistency in policies, and the inability to identify priorities and implement them have all raised doubts about governance.

These terms have several connotations, however, and it is appropriate therefore to define and distinguish them so that their influence on public expenditure management can be assessed.

Definitions and Distinctions

Governance, like obscenity, is difficult to define as a legal phrase. The lack of it seems to be more easily felt than governance itself. Although that may sometimes be a virtue, the term refers very broadly to the use of political and economic authority on behalf of and over a society on the management of resources for such purposes as are deemed appropriate by that society. The choice of such purposes or the goals of that society are prerogatives vested in the society itself, as is the choice of institutions and systems used as instruments to achieve those goals. Governance implicitly guarantees the civil and human rights needed for effective participation and the information flows that enable the members of society to make their choices. In this broad perspective, however, it has several dimensions, which, although important, are not a part of the focus of discussion here. From the more limited perspective of public expenditure management, the three components of governance are rule of law, transparency or openness, and accountability.

The rule of law (regardless of its form and philosophical orientation) implies the existence and operation of a system based on rules, approved by appropriate authority, and generally justifiable in a court of law. Such a system presupposes that the set of laws governing the conduct of expenditure management is known in advance both to those administering the rules and to those administered, that the rules are applied in practice objectively, and that adequate mechanisms exist to resolve conflicts. Specifically for expenditure management, as explained in detail in Chapter 2, such laws have been codified as part of either common or civil law and have been available for a number of years. Thus, if the existence of rules were the only criterion for judging the adequacy of governance, it might be safe to say that that condition is fulfilled. But this fulfillment does not necessarily imply that governance is complete.

Two major limitations need to be considered here. First, not every aspect of a government’s working can be codified precisely or unequivocally. The work of government is so dynamic that in numerous ways laws lag behind events. Thus, laws are being made tentatively to react to changes in the economy and the responses thereto. The second limitation is the extent of the codification and the interpretation of law. Experience of expenditure management over the years illustrates that excessive codification makes every manager a robot—with little flexibility of his own. The administration of law takes precedence over the administration of policy. Although no policy that is prima facie illegal should be implemented, in practice a number of gray areas require specification. Associated with this is the interpretation of law. Experience in the United States and elsewhere suggests that as laws of equity and allocation of resources are interpreted by courts of law, expenditure management takes a backseat because of the necessary obligation of the law. But as most of the interpretation of law is at a nascent stage, the verdict of one court becomes the subject of review of another.⁹ This also suggests the possibility of a conflict between those responsible for expenditure management and those responsible for interpretation of the law. Thus, an area of concern still to be resolved in any discussion of governance is not the need for or the form of it but the practical experience of expenditure management in a legally circumscribed framework.

Transparency or openness is a characteristic of governance. It refers to the availability of information to the public on the transactions of the government and the transparency of decision-making processes. Two interrelated issues are inherent in this phenomenon. One is the nature of information and the other is the use of that information; the latter is largely dependent on the former. The general experience with the first is that much information is provided to the public and the legislature. Thus, in addition to the voluminous budget documents (except for the centrally planned economies), periodic information is published on the status of public finances, and the submission of completed accounts, (with varying lags) at the close of the fiscal year, completes the cycle. The issue, however, is not the amount, but the content and form of the information. It seems that the information is arranged not to be transparent but to draw a veil over it. Although this tendency is by no means new,¹⁰ the feeling is growing that the language used is clear only to those professionally engaged in financial management, with one expert communicating with another. It is even suggested that when voters exercise their franchise they do not necessarily do so on an objective assessment of the pros and cons of government programs. More often, they may be influenced by image, anecdote, metaphor, or even a bit of engineered ignorance¹¹ (the result of deliberate deception by political groups). Moreover, even when information is available and clear, members of the community may prefer not to “voice” their grievances and may prefer not to “exit” because of uncertainty about alternatives. The argument of a “free rider” is also relevant, as the cost of exercising the franchise may be higher than any benefits that the voter is receiving. Thus, a voter may take comfort in what he has rather than face the ordeal of either changing it or searching for an alternative. The virtue of a democratic form of government consists in enabling a free flow of information so that appropriate choices, if desired, can be made.

As discussed in the section on public and private sector practices, the characteristics of the former are that they have to work in a framework of legal and formal constraints and under the presumed constant glare of public scrutiny and the associated public expectations of fairness, responsiveness, and honesty. Accountability is a shorthand expression for these expectations and in general refers to the mechanisms by which decision makers are held responsible for performance by those affected by their decisions. The demand for such accountability appears to increase as fiscal problems persist, as discussed earlier. Indeed the demand for panaceas and instant solutions is growing. It has to be recognized, however, that each budget (assuming that it includes all the financial transactions of the government) is in itself an expression of approved, and to a very large extent, continuing policies. The policies reflected in the budget may therefore have been in effect for some time and the budget estimates merely reflect them. If accountability had been complete or productive, some of the problems associated with fiscal crisis may not have arisen. On the other hand, because policies were approved and made accountable, the final result should have been a foregone conclusion.

Accountability, however, although simple in intent, is complex and is envisioned differently at different levels. Here, three approaches are relevant. First, a democracy may not always be successful in making the right choices and formulating the right policies or in rejecting the palpably wrong ones. In such a context, accountability should really be concerned with exploring three aspects: What criteria should govern expenditure choices? What type of procedure would be appropriate to facilitate those choices? What kind of information would be needed?¹²

Determining social choices has never been easy. Despite enormous scholarly work, there are still no conclusive answers about reconciling individual values with collective desires and decisions. The Pareto criterion, which is one of the icons of economics, deals with improvements (or incremental efficiency) in a community that is already considered just. The more recent public choice theory, however, contends (as noted earlier) that frequently there is collusion between the predatory self-interests of administrators and politicians and that the best means of breaking this hold on expenditure decision making is to promote a constitutional order that ensures a balanced budget. Expenditure choices are not restricted only to the overall balance, but extend to, and indeed may be primarily concerned with, the balance in the composition of expenditures. The issue then is the procedure appropriate for reflecting society’s choices in selecting programs. In principle, it can be argued that such a choice is made by the elected representatives, or by the civil servants in a framework of delegated authority. But the expression of the people may be less specific, leaving considerable flexibility to the administrators. Moreover, the representative who is expected to exercise his options reflecting the needs of the people has to combine in himself two functions—a representative of people—and a trustee of the nation’s interests. Reconciliation of these two aspects has not yet been accomplished, thereby leading to a muddling through approach. Moreover, because the normal increment in a budget is rather small, what discretion can be expected from the legislator, or his proxy, the administrator? Implied acceptance of the continuing programs provides them with a degree of legitimacy, and in due course the stamp of approval. Also, in dealing with new proposals for expenditure that accord with the wishes of the people represented, a balance has to be struck with the overall stability of the country, which requires a more judicious approach in exercising the trusteeship role.

The information aspect aims at ensuring that the choices are made with full knowledge of the facts available (that may and indeed often differ from the “full” facts) and that the decisions taken can be easily ascertained by the public. In short, it refers to the transparency aspect discussed above. Although all the three issues raised may at first seem formidable, choices are made regularly and benefits are provided from the public moneys. The patterns of expenditure management machinery (discussed in the following section and in Chapter 2) reflect these aspects.

Another approach to accountability has been to test the feasibility of “exit” and “voice” in dealing with the services to be provided by the government. In a free market, an individual has the right to exercise his preference for one product over another, or to articulate his preferences so that the provider of the product can moderate or adjust it to conform with the consumer’s preferences. An extension of this approach suggests that a citizen should similarly have an opportunity to express his view either through an exit or through his voice. This exercise would not apply to pure public goods like national defense but would be restricted to other goods and services that are marketable. In that context, and if the government is not a monopoly provider of the goods and services, exit by the buyers who then seek an alternative source of supply would adversely affect the working of the government. The final test of accountability in this situation is the market failure of a nonmarket organization. Alternatively, if the service provided is not utilized because of lack of consumer orientation, the government would normally be obliged to amend its product or service. The voice then can be both a market response mechanism as well as a political response mechanism. The second approach becomes more important in dealing with pure public goods as the normal market tests would not be applicable.

A third and more practical approach to accountability is to view it as an expression of hierarchical control. Such control may be viewed on various levels—between the legislature and government; between ministers and the civil service; between central agencies and spending agencies; and between departments and their subordinate bureaus or offices. Accountable management implies that individuals and organizations are responsible for specified levels of performance. This relationship between, for example, the legislature and the executive, is illustrated in Figure 1. But restricting accountability to the final performance, however specific and detailed, would be narrow and would not provide satisfactory answers to the issues of criteria of spending, procedure for making choices, and adequacy of information. Thus, accountability will have to be broader and cover all the aspects of the expenditure management cycle. The components of such accountability are illustrated in Table 1.

The existence of the institutions or the systems does not necessarily ensure accountability. Governance, transparency, and accountability are not absolutes but are relative to the demands made on the expenditure management machinery. As these demands vary, so also does accountability from time to time and relative to those demands. In practice, however, several factors appear to narrow fulfillment of accountability in the current situation. In a number of countries, the budgets represent only a portion of the public transactions. Policies are pursued through a range of enterprises, quasi-fiscal accounts, and other instruments. These aspects also have to be made accountable. However, where budgets are approved by the legislature after little consideration, or where completed accounts are not submitted, and when submitted, are not considered by the legislature, accountability is likely to remain a hollow shell. The effectiveness of accountability in the end depends on the willingness of the public to use the instruments available, on the adequacy of hierarchical controls, and on the openness of society and its ability to display its strengths and deal with its sores and bruises with determination.

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Accountability Relationship

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Table 1.

Accountability Framework

Table 1.

Accountability Framework

Category	Principle	Intent of Principle
Expenditure choices	Prudence	Reasonable assessment of prospective income: what can be achieved at what cost
	Macroeconomic impact	Explicit recognition and assessment of linkages between the budget and the economy
	Priorities and annual adjustments	Formulation of priorities in light of the above assessments and explicit recognition of needed adjustments
Program implementation	Propriety	Application of funds for purposes approved by the legislature
	Economic management	Economic, efficient, and effective implementation of policy and program
	Adequate delivery systems	Availability of necessary machinery to ensure timely and courteous delivery of services
Information	Material matching	Availability of comprehensive accounts
		Process by which outputs and income are related in a time frame to cost of services
	Consistency	Uniform practices of recording and classification
	Timeliness	Production of information in time for use by decision makers in government and the public

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Table 1.

Accountability Framework

Category	Principle	Intent of Principle
Expenditure choices	Prudence	Reasonable assessment of prospective income: what can be achieved at what cost
	Macroeconomic impact	Explicit recognition and assessment of linkages between the budget and the economy
	Priorities and annual adjustments	Formulation of priorities in light of the above assessments and explicit recognition of needed adjustments
Program implementation	Propriety	Application of funds for purposes approved by the legislature
	Economic management	Economic, efficient, and effective implementation of policy and program
	Adequate delivery systems	Availability of necessary machinery to ensure timely and courteous delivery of services
Information	Material matching	Availability of comprehensive accounts
		Process by which outputs and income are related in a time frame to cost of services
	Consistency	Uniform practices of recording and classification
	Timeliness	Production of information in time for use by decision makers in government and the public

Expenditure Management

Expenditure management systems have evolved over the years, reflecting the increasing tasks of the government, and, as a consequence, its budget. In the early stages, the budget was treated as a financial plan that emphasized the mechanisms of payment, accounting, and reporting. Later, the economic implications of the budget were recognized, and the budget itself came to be perceived as a major instrument of economic planning and macroeconomic stabilization and growth. More recently, and as illustrated in Table 1, the budget has come to be viewed, inter alia, as a comprehensive exercise in resource allocation and management with emphasis on relating costs to performance.

The expenditure management system therefore recognizes, in the current setting, the resource constraint in the various stages of governmental decision making, from the determination of the total magnitude to the allocation and management of expenditures. Here, expenditure management is viewed as a composite process contributing to timely and effective decision making on the use of public money. The operational framework of expenditure management comprises a three-stage administrative process: (1) determination of the policies and objectives and the resources needed to attain them; (2) allocation of resources needed to attain the objectives; and (3) assurance that specific tasks are carried out economically, efficiently, and effectively. In practical terms, these correspond to formulating a fiscal plan (thinking process), formulating a budget (operational legal framework), and implementing a budget (doing process). These three phases can also be examined in terms of resource allocation planning, resource use management, and information systems.

Resource allocation planning involves a reasonable assessment of prospective receipts and the costs associated with raising receipts, and an explicit recognition of the linkages between government budgets and the economy. It includes setting priorities and policy goals, with adjustments for allocating resources to continuing and new services and formulating contingency plans to accommodate unexpected changes. This process is, however, far more complex than may at first appear.

Traditionally, there has been a good deal of debate about policy and objectives.¹³ “Policy” is used here as a term to describe a set of interrelated and consistent objectives, plans, and decision rules. The organizational responsibility for specifying such policy is a different matter; it can be interpreted as the collective responsibility of the whole government, or, at a more disaggregated level, as the responsibility of specific agencies such as finance or planning. The first task is to assess the macroeconomic framework. Such an assessment facilitates the specification of objectives relating to stabilization, growth, and, as integral parts thereof, of balance of payments, domestic and external credit, level of employment, and other factors. The macroeconomic framework permits an evaluation of the continuous interrelationship between the macroeconomic model and the aggregate as well as the components of expenditure. The determination of aggregate expenditure (and for this purpose, it should include all expenditures, whether formally included in the budget or organized outside it) in turn depends in practice on the present commitments to relevant ongoing activities and the threshold needed to accommodate policy decisions already made, or those likely to be made. Within those present commitments, the programs where stepped-up activity is indicated and the costs thereof should be considered. These programs, in turn, are assessed in terms of the economics and politics of the aggregate revenue and expenditure balance, the constraints of the commitments already made and the resources available, and the trade-offs among them. As an integral part of this assessment, the status of public investment plans (where such plans are in operation) is also evaluated.

A more detailed review of the programs and their components is then made. The various steps involved in this review can be stated in terms of the following general principles (some of which have been adapted from Lewis (1988)).

• All expenditures should be formulated in terms of program packages.

• Every program package should be supported by cost estimates.

• Cost estimates should be built in terms of objects of expenditure—wages and salaries, equipment, etc.

• Control of spending could be in terms of both programs and objects and should not, in large organizations, be highly centralized.

• Programs should be supported by data on productivity indices, unit costs, and other indicators of efficiency if such data are relevant.

• Programs should be evaluated in terms of costs and benefits before being undertaken.

• Such evaluation should include analysis of political, social, legal, and administrative issues.

• Program objectives should be expressed in terms of outputs and anticipated benefits.

• Program packages should also specify the organizational responsibilities.

• Special aggregation of programs crossing organizational lines may be made for analytic purposes without disturbing structures aligned with organizational responsibilities.

• Before preparing detailed budget estimates, executives should provide policy guidance on the objectives to be achieved in that year; set specific target amounts deemed reasonable for programs rather than arbitrary percentages of the budgets; allow agencies to formulate second-priority programs if initial estimates are higher than targets; and request studies to be made in special cases before final decisions are made.

• Coordination between revenues and expenditures should be continuous so that the changes in the former and their impact on the latter can be identified.

• Expenditure plans should generally include contingency provision for unforeseen events.

• The above principles should also be adhered to in reallocating funds during the resource utilization phase.

The principles—which cover the theoretical and practical developments in the art of budgeting and management during the last three decades—are considered generally applicable to public authorities. Their actual application, however, is different, and several problem areas exist, as discussed below. These problems result not from any built-in inadequacies of the principles but from the interaction between systems, individuals, and events.

Resource use management involves applying three principles—propriety, accountability, and adequacy of the systems for the delivery of services. Propriety, as indicated in Table 1, refers to the application of funds for the purposes approved by the legislature. During this phase, the process controls or accounting controls have full play in that through various instruments, releases, commitments, payments, and use of acquired goods and services, the flows of money are controlled. These controls, in turn, may be operating within a management environment that specifies the role of audit and the observance of credit ceilings, if any.

Accountability, as noted earlier, refers to the implementation of policy prudently and transparently; adequacy refers to the capacity to produce results commensurate with outlays. During these phases, different types of controls aimed at achieving efficiency may also be deployed.

Information systems involve the production of data for use by decision makers inside government and to an extent outside government. Such information needs to be consistent and comparable over time and should facilitate the matching of income, output, and cost of services to the specified time frame.

These three phases of expenditure management summarized in Chart 1 should be considered part of an overall composite culture in which each phase leads to another to facilitate the implementation of approved fiscal policies. Each phase has its own terms of reference, which are rendered meaningful not in an independent or isolated fashion but only as a composite culture. The phases may be operated by people drawn from professional cultures; thus, resource allocation planning may be dominated by economists or budgeteers, and resource use and information systems by accountants and efficiency experts, reflecting the considerations that come into play at each stage. The fulfillment of the policy goals depends on the continuity shown in the transition from one stage to another.

The overall expenditure management system, judged by the results, reveals a number of problem areas. Although the areas as well as the magnitude of the problems vary from one country to another, there is little congruence between fiscal plan, formulated budget, and implementation of the budget. In each phase aims are pursued that are independent of the strategy underlying formulation of the fiscal plan. Because a resort to expediency is often convenient from a political viewpoint, the budget formulated differs from the fiscal plan, and, in implementation, what is implemented tends to differ from the fiscal plan and the budget. In reality, there appear to be three budgets, each with a different purpose. The first is a commitment budget, where commitment refers to the political promises made to introduce a program here and to undertake a project there, and not to the placing of an order to deliver goods and services for which payment may be made later. Such programs and projects, which are promised in the day-to-day life of a government, transcend the self-imposed parameters of a formal development plan and are more like lists to be accommodated either in the ongoing or in one of the future budgets. The existence of such an informal budget constitutes a powerful influence on the formulation of the regular or legally approved annual budget. In addition, it may also have a powerful announcement impact.

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Public Expenditure Management Resource Allocation Planning

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This commitment budget is followed by a budget for the year, which is a statement of proposed policies and the associated financing, intended for discussion and approval by the legislature. It is a framework based on assumptions and scenarios about the additional mobilization of resources and the foreign aid (which is substantial in several countries) to be received. Once the fiscal year starts, however, the scenarios underlying the budget may have been too rosy, and the expenditure reductions (indicated more in the form of asterisks or footnotes, particularly when the proposals are highly tentative) less than feasible. At that stage, a cash-based budget emerges, in which the predominant consideration is to achieve some congruence between inflows and outflows of cash. This congruence is achieved by limiting payments so that specified credit policies can be observed. Such a cash or disbursement-oriented budget can be, and often is, at variance with both the fiscal plan and the legal budget. The existence of these three types of budgets largely represents the absence of a coherent expenditure management strategy. Also, the quality and content of economic forecasting and the manner in which economic uncertainty is internalized are less than desirable. Moreover, more precise identification and measurement of the budget deficit and its impact are also necessary. In most cases, the budgetary outcomes differ from the amounts planned because of the allocations to approved expenditure programs that prove to be unsustainable during the year. Higher-than-estimated outlays on debt, subsidies, and entitlements seem to have become routine. Development projects show considerable cost escalation.

An analysis of the budgetary outcome shows that it is different not only because of the volume-price relationships but also because of the introduction of new policies and projects with little consideration for their resource requirements. When the impact of these initiatives is recognized, and to achieve a semblance of adherence to intended budgetary ceilings, payments are controlled. Such approaches appear to lead to the buildup of arrears and unpresented checks. More important, the resource use phase reveals that the instruments chosen could not anticipate contingent liabilities. Further, as centralization of payments was frequently utilized to avoid possible misuse of funds, an avoidable increase in transaction costs arose. This phase also reveals the futility of accounting controls when the leakage was primarily from the policy formulation phase. Where spending overruns represent a rebound in spending compressed during early periods or commitments that are far in excess of available resources, payment restrictions, instead of appropriate policy changes, are unlikely to prove rewarding. Moreover, the considerable lags in the collection of data on payments to and by governments have also obstructed the pursuit of appropriate economic policies. Experience also shows that any failure, however small, in implementing expenditure programs introduces distortions into the economy. Although not all the above areas are the results of a system or a technique, the absence of a strategy to use the composite culture may also have contributed to the plethora of problems.

Control Framework

To state that control is to expenditure management what oxygen is to the human body is to understate its importance. Over the years, control has been a paradox in that it appeared to be known and verifiable in one form or another, yet very little was known about some aspects of it. To use a churchillian expression, it was for many, “an enigma wrapped in mystery.” The language used to describe controls may also have exacerbated the situation: for example, “accounting controls,” “administrative controls,” “management controls,” “program controls,” and “budget controls.” Are they different categories? Are they substitutable? Which type of controls does what? These are only some of the many issues that arise in comprehending and analyzing controls.

Control is by no means new and indeed is as old as statecraft. Early attention was paid to organizing the state treasury. Thus, more than two millennia ago, Book of the Rites of Zhou (China), a manual describing the tasks or the functions, explained the responsibilities of officials in managing finance:

Waifu were in charge of receiving and paying money; Sihui supervised revenue and expenditures; Sishu kept records of the amount of land, number of residents, and spending; Zhinei were in charge of revenue, Zhishui supervised expenditures and Zhibi managed surplus money handled by departments and units.... Any expenditure was to be reported to one of them....¹⁴

After that, Sihui checked them out and kept the accounts. The control function was then a twofold exercise—verifying the transaction and ascertaining the authority that enabled the expenditure to be undertaken. These functions were undertaken by a single agency—whether it was part of the royal office or part of the treasury that came to be organized later as a separate agency under royal supervision. Thus, until recently, control was conceived essentially in “singular” terms reflecting the control exercised by the treasury or later the ministries of finance. Control also meant verification—a connotation that persists in some European management systems. Later, however, it acquired another dimension—as a constant oversight on appropriations—obtaining and spending funds—and came to be viewed as consisting of line-item control of those appropriations.¹⁵

Control is not singular, and used in the plural, controls represent rational systems designed to enhance the performance of organizations and, specifically in regard to expenditure management, are processes that enable the specification of objectives, the allocation of resources, and the economic, efficient, and effective utilization of resources while pursuing the objective of stability. These functions are to be performed in an accountable manner. Control also has another dimension—as an expression of power and of hierarchical relationships in an organization. Consideration of both these aspects provides an overview that in turn helps to identify problem areas.

Management Process

Control should be viewed as a network in which at various times and administrative processes several techniques are used to ascertain that government transactions are undertaken in pursuit of a coherent strategy or objective. Thus, in its broad contours, and following Anthony’s (1965 and 1988) approach, the control process, as illustrated in Chart 2, may consist of strategic planning, management control, and operational control. The first phase refers to the formulation of objectives and corporate plans, the second to the process by which resources are obtained and policies determined governing the use of those resources, and the last to the process of ensuring that the tasks are carried out as intended. In all these phases, two elements are mixed in varying proportions to achieve the desired objectives: planning and control. Planning is specific and narrow in that it requires either an organization or a chief executive, or in government, an agency head, who is viewed here as the decision maker or policymaker. In strategic planning, the focus is on determining the issue, how it can be addressed, the consequences of each approach, and the feasibility of each assessed in terms of the implementation capacity of the organization. Control, on the other hand, refers to the implementation of the decisions arrived at in the preceding stage, where each objective and related assignment is divided into manageable parts. The task of planning implementation remains, however. Thus, progressively, as the implementation stage is reached, there will be a preponderance of control to ensure compliance of specified tasks. Control varies from one stage to another.

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Expenditure Management Cycle

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Controls in an agency can be external and internal. External controls represent those exercised outside the agency. Specifically, in expenditure management, they may be exercised by the legislature, central agencies, the president’s office, the central bank, or others. (Legislative controls are not considered here.) Internal controls represent those that are part of the organizational structure of the agency itself and thus amenable to its decisions and discretion. Both these types of controls are illustrated in Chart 3. The external controls, depending on the organizational legacy and culture of the country concerned, can be vast and cover practically every aspect of public expenditure management. They may no longer be considered homogeneous, except that they have the same underlying themes of economy, efficiency, effectiveness, and stabilization; they are heterogeneous, as the focus differs from one stage to another. Controls so exercised by external agencies tend to have government-wide applicability and may therefore be considered macro controls, but they have to be supplemented by the micro or operational controls exercised by the agency itself. Both types of controls complement each other and have a symbiotic relationship. Thus, neither is meaningful or effective without the sustenance of the other.

The external controls start with the determination of macroeconomic policies and of the permissible magnitudes of expenditures and their various components and deficits. These global targets are translated into expenditure plans through an iterative process that results in budgets that, in turn, provide the needed legal and administrative authority for the annual cycle. In addition, central agencies also have the powers to exercise several regulatory functions. They specify the regulations governing internal accounting systems, earmarked funds, expenditure norms and standards, and the types, forms, and timing of reporting. Further, depending on the tradition of administration, certain payment functions may be centralized and performed directly by the central agencies. Where such payments are centralized, the tasks of the agencies are restricted to processing relevant documentation. These controls, which are structured and have recognized places in the process, are supplemented (when warranted) by ad hoc controls (so considered because they have a defined period of life), which on occasion even supersede the regular controls. Thus, macro controls may even become micro controls when the number of personnel to be hired or terminated, the amount of travel, the acquisition of assets, and payments become subject to quantitative restrictions. Concluding the cycle is the evaluation of completed programs and projects undertaken by central agencies.

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External and Internal Control Framework of an Agency

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Ideally internal controls are the operational controls that supplement the macroeconomic strategy outlined by the central agencies. Thus agencies are typically required to undertake their own strategic thinking concerning their sector of operations and to prepare relevant budgets. Relative to the bureaus and other organizations under its own control, the agency and its top echelon would be engaged in strategic planning, with the difference between the central and other agencies being that the former is concerned with the whole economy and the latter with a sector in the economy or a part thereof. Once the expenditure plans are formulated and approved, however, the focus of the agency turns to management and operational control phases. Thus, the agency will be concerned with personnel management (a constant in any administration) as well as with the management of specific areas that are unique to it and therefore have to be determined by it. These areas may relate to the activities of enterprises under its control or to determining the grant and loan proportion of its transfers to other agencies. This is preceded by determining those expenditures to be incurred by the agency itself and those transferred to other agencies and that are therefore under their control. Controls exercised in regard to bidding and contracting (features applicable to procurement, construction, and contracting out are considered in Chapter 8) are different, because the regulations are specified by the central agencies for uniform application but are ensured by the agencies. Next are controls in regard to payments where the primary consideration is to verify accuracy and requisite authority and the safe custody of public moneys. If payrolls are centralized, however, they may be administered by the central agencies on behalf of the entire government. As an associated aspect, contingent liability management may be undertaken either centrally or by the agencies. Where it is a responsibility of the agencies, the contingent liabilities may be consolidated by the central agencies. The agencies are also responsible for maintaining the assets and liabilities under their management. They also undertake evaluations of programs and projects, but the framework of evaluation is specified by the central agencies.

The central agencies are thus broadly responsible for stabilization by ensuring that the aggregate level of expenditure is appropriate and that the allocations to sectors and programs are balanced. The agencies are responsible for achieving economy, efficiency, and effectiveness in the implementation of programs.

Expenditure Controls

To illustrate how external and internal controls are exercised, they are reclassified in terms of functional categories depending on the purposes to be served. Thus they may be divided into policy controls (formulation of macroeconomic policies and agency strategies), process controls (personnel, procurement, construction, and payment controls), and efficiency controls (measurement of performance and evaluation). These three groups are then examined by relating them to the type of controls—command, cooptive, and incentive; the results are illustrated in Table 2.

Policy controls, which relate to the formulation of government-wide macroeconomic strategies and related global targets, tend to be primarily the responsibility of the central agencies. Although, as noted earlier, policy formulation is an iterative process, influencing the final outcome depends on the role of the central agencies. Where the resource ceilings are specified by the central agencies, policy controls tend to become commands, as they cannot be unilaterally altered by the agencies. But, if there is broad communication about resources and transparency about how the estimates were reached, they can also be the results of a cooptive approach.

Table 2.

Exercise of Controls

Table 2.

Exercise of Controls

Type	Policy Controls	Process Controls	Efficiency Controls
Command	X	X
Cooptive	X		X
Incentive	X	X	X

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Table 2.

Exercise of Controls

Type	Policy Controls	Process Controls	Efficiency Controls
Command	X	X
Cooptive	X		X
Incentive	X	X	X

Process controls refer to the fulfillment of legal obligations. Laws or related regulations have to be observed in regard to personnel, procurement, and construction, as well as payments. In addition, in some cases, payments may be centralized. In both cases, the exercise of the controls will be viewed as centrally determined or centrally regulated.

Specification of efficiency standards is largely viewed as an exercise in cooptive power as these standards are jointly determined by the central and the spending agencies. Further, to ensure compliance, agencies may also be given incentives. But such incentives will be centrally determined to ensure uniform application. The framework of controls is largely dominated, therefore, by the central agencies, as they are responsible for policy and for specifying methods to achieve it and for regulating the expenditure management activities of the agencies. This exercise is not unilateral, however, for central and spending agencies participate jointly in every aspect.

Exercise of these controls has given rise to several issues. It is generally noted that the intervention of the central agencies is intrusive and therefore counterproductive, that the structures tend to promote dysfunctional behavior, and that the rules devised are inefficient. At issue also is why some of the less useful practices have persisted over time. Some of these aspects are considered in more detail in the following chapters. Three major criticisms of the structures and systems of control are considered here.

First, most of the controls and activities of the central and spending agencies seem to operate in a reactive, rather than a proactive, mode, occupied by crisis or other short-term agendas, and with little or no focus on policy and strategy over the medium and long term. Basically, this condition is attributable to the way governments view problems and issues and make expenditure and related management decisions. As one futurologist noted, “we know in our hearts that we are in the world for keeps, yet we are still tackling 20-year problems with 5-year plans, staffed by 2-year personnel working with 1-year appropriations. It is simply not good enough.” This reactive mode has contributed to specified intervention, unspecified interference, and even to the centralization of some tasks. The lack of clarity at the helm is compensated by interference whenever the situation warrants.

Second, the structure is dominated by process controls that tend to be deterrent, and they are not matched by positive controls that also have a degree of “compellence,” to use Schelling’s phrase. As David Hume noted a long time ago, “balance is a constant rule of prudent politics.” It is also a prudent rule applicable to organizations. But balance is difficult to apply, because more than anything else it is a matter of perception. When intrusion replaces policy guidance, such perceptions about the lack of balance become stronger and tend to become obsessions. More important, process controls can hardly compensate for the absence of policies.

Third, the controls exercised have obvious limitations. For state purposes, specified rules are not applied to some expenditures. Some policies that are determined politically are exempt from controls, as are expenditures for security. Obvious attempts at circumvention and prominent leakages such as accumulation of payment arrears and ghost employees tend to undermine confidence in the system. It is difficult, however, to pinpoint which particular factor is more responsible for the present debilitated state of expenditure control in public bodies. The words of the poet T.S. Eliot, “and as in time results of many deeds are blended/so good and evil in the end become confounded” have a unique applicability to expenditure management.

Toward the Seee Paradigm

The central issues that emerge from the preceding description and discussion of issues are why are some systems successful and why do some fail? Since the issues are likely to persist and to become more complex in the future, what type of systems would be appropriate? Although details of various aspects and experience with each system are considered in later chapters, a combination of factors seems to be at work behind the success or failure of each. Broadly, the determinants of any system are dependent not merely on its components or the attention given to policy, process, and efficiency controls, but on the other factors illustrated in Figure 2. Although identifying and anticipating problem areas is a normal function of management, its ability is put to the test in evolving policy measures and supporting administrative measures that secure political and public support. No package can be expected to succeed unless it reflects public consensus, and no consensus can be built without disseminating information on the components of the package and its potential benefits as well as its relevance in tackling the problem. Available experience suggests, however, that in addition to the absence of efforts to build a consensus the packages frequently lack administrative preparedness. This area needs to be addressed in strengthening expenditure management.

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Determinants of a System’s Success

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Expenditure management will continue to be concerned with securing stabilization, economy, efficiency, and effectiveness (SEEE). Their roles differ from one stage to another. It is a dynamic combination in that the relative roles will vary. Chart 4 illustrates these aspects. Stabilization is primarily concerned with the aggregate level of expenditures, and, to a lesser extent, with the composition of expenditures. Thus, all efforts aimed at securing stabilization will be focused on determining that level, and thereafter, the expenditure management machinery will have to ensure that that level is sustained and that in observing that limit, there are no diseconomies. Considerations of economy and efficiency and of stabilization are not mutually exclusive but are interdependent. It is difficult to view stabilization as successful if it is achieved at considerable cost and with avoidable idleness of resources; on the other hand, achieving economy and effectiveness would be little compensation if destabilization results.

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Pursuit of Stabilization, Economy, Efficiency, and Effectiveness (SEEE)

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Pursuit of economy moves in tandem with pursuit of stabilization. It consists in less resources being used than planned. It implies that while a good deal of attention is given to this aspect at the resource allocation stage, more resources may well have been allocated than needed, and that with judicious attention to the details of implementation, agencies could be induced to be vigilant in achieving economy. If, on the other hand, the allocation of resources is based on what could be considered inviolate norms or standards, agencies would have little incentive to look for economies. The scope of the economies also depends on the composition of expenditures and on the role allotted to procurement and contracting out.

Efficiency—the use of resources in relation to outputs—or the ability to produce more with the resources allocated—is dependent primarily on the efforts of the spending agencies and their awareness of the interests of their clients as well as of the utilization of the services provided. Specifying the measures of efficiency and incentives for retaining the savings procured in the process is likely to provide a powerful stimulus to the agencies.

Effectiveness—the degree of fulfillment of program objectives—forces the agencies to adopt a managerial attitude in specifying the objectives to be achieved and in monitoring the progress in tasks assigned. In a common and transparent framework of evaluation, the agencies would have opportunities to look back and learn the lessons of experience for future application.

The pursuit of this SEEE paradigm involves a differentiated focus and application of the components. Thus, if the problem is one of adhering to the budget estimates, greater attention may be needed both at the estimation as well as at the implementation stage. If, on the other hand, the issue is one of excessive use of resources in relation to needs, the emphasis will have to be on economy. Greater savings through efforts at economy may even suggest laxity at the allocation stage, or may have been the result of cumulative neglect. But if the system is developing leakages, and inefficient operations tend to dominate the fiscal landscape, greater efforts to restore efficiency would be needed. If, despite all these efforts, no demand for the services is generated, or, in other words, the operation is ineffective, the policy itself may need to be reviewed. Thus, instead of having a management system that is on auto pilot without any particular destination in view, management should provide a unifying and overriding theme(s) for all the phases and points of expenditure management to develop and implement a differentiated and situation-specific approach.

The pursuit of the SEEE paradigm should not be considered either easy or always productive. It is unlikely to prove rewarding where, for example, deliberate overmanning is undertaken as a policy measure, or where the expenditures are dominated by transfer payments (that are money intensive and reflect previous commitments). As a minimum, however, the pursuit will reveal the rigidities of the system, and, if properly conceived and judiciously implemented, offers considerable potential.